Tuesday, March 11, 2014Economists are mixed in reaction to Ohio governor's budgetAn income-tax cut will be funded by an increase in the severance tax and cigarette taxby WKSU's STATEHOUSE BUREAU CHIEF KAREN KASLER

ReporterKaren Kasler

The governor's budget calls for a hike in taxes on drilling and cigarettes, while cutting income taxes.

The governor’s budget update includes another state income tax cut – paid for with increases in two existing taxes. Statehouse correspondent Karen Kasler reports the idea is either good or bad, depending on the economist looking it over.

The governor’s office says the proposal for an across-the-board income tax cut of 8.5 percent will bring the top tax rate down to below 5 percent - bringing the tax cuts that John Kasich has shepherded through the Legislature to a total of 17.6 percent from 2011 until now, if this latest one passes.

This tax cut would come courtesy of two increases in existing taxes – a hike in the severance tax to 2.75 percent of gross receipts on big oil and gas drillers, and a 60-cent jump in the per-pack cigarette tax, from $1.25 to $1.85.

Support from fellow Republicans?The Republican-dominated Legislature hasn’t been very supportive of tax increases, and in an election year, that seems even more unlikely -- even if they're increases that polls show many people support. Conservative economist Richard Vedder from Ohio University says the plan fits in with the governor’s overall goal of shifting from income taxes to consumption taxes, which Vedder says he thinks will spur economic growth.

“The state budget numbers through the first eight months of the year are more than $300 million above estimates when they were put together last summer. So there’s a little wiggle room to negotiate, and I suspect that negotiation might come in the form of some reduction in that cigarette increase.”

“Neither one of these taxes is what one would call a sustainable, long-term source of revenue, at least in the real long-term. What have we seen with the cigarette tax? It’s gone down as people have stopped smoking, and it probably will go down some more as it increases further.”

And Schiller says overall, he continues to be skeptical that income tax cuts will create jobs – because he says they haven’t so far.

Job growth: 'Just wait'“Ohio has produced fewer new jobs than the rest of the country, and isn’t that the bottom line? That’s true whether you go back to when a big round of tax cuts were passed in 2005, and it’s true whether you go back to the end of the recession, whether you go back to the governor’s term – whatever time period recently, except for maybe the last month.”

But Vedder says, just wait.

“I think tax changes take time to operate. There’s a body of academic evidence indicating that from the time you approve a tax cut to the time it has a real impact is usually at least two to three years. So I expect one should show some patience in this. This is not an overnight fix.”

A cigarette tax increase could hit lower-income Ohioans hard, since there are more smokers in that population. But the mid-biennial budget also includes some tax changes that would specifically benefit people making less than $80,000 – and even anti-poverty activists say a tax that could help poor people quit an expensive and dangerous habit may be worth it.

Here's Gov. Kasich's spending plan:

Education: K-12

Dropout Prevention: The Ohio Department of Education and local school districts develop strategies to identify kids at-risk of dropping out, and connect with special career counseling and “alternative pathways to diplomas.”

Dropout Recovery: Proposes allowing community colleges and career centers to help adults earn credits toward a high school diploma while pursuing job training and credentials.

Mentorship: Proposes $10 million from casino-license fees for 3-to-1 matching grants to support community groups and businesses-mentor students.

Expanding Vocational Education: Making technical and vocational education available to students beginning in the seventh grade, but allowing school districts to opt-out of the expansion.

Higher Education

High School-Age College Enrollment Program: Encourage more students to earn college credit while completing high school courses by simplifying and changing funding in a way “that works for both high schools and higher education institutions.

Graduation: Enacts the final piece of higher-education graduation policy to fund two-year colleges based on “successful student outcomes,” and gives school greater payments for older, low income, and minority students that are successful.

Ohio's Technical Centers: A new formula to shift the focus to students finding jobs by basing funding in part on the percentage of students finding jobs in their area of study and in part on the number of students who complete a workforce training program, or successfully receive an industry- recognized credential.

Technology and Distance Learning: Provide the chancellor of the Board of Regents with the ability to enter an agreement with the Midwestern Higher Education Compact “to allow Ohio colleges to deliver distance education to students in other states.”

Keeping Ohio's International Students in Ohio: The chancellor of the Board of Regents will create a “globalization liaison.”

Tuition: Giving Ohio's community colleges the option of giving their students a guaranteed tuition rate.

Veterans: Setting up uniform standards and procedures for granting college credit for military experience and ensuring that Ohio's public colleges and universities do not charge veterans “for evaluation, transcription and application” of military experience.

Taxes

Income tax cuts: Cutting income taxes across all income levels by 8.5 percent over the next three years. Also, increasing the Earned Income Tax Credit 5 to 15 percent of the federal credit. Raising the personal income-tax from $1,700 to $2,700 for Ohioans earning less than $40,000 a year and from $1,700 to $2,200 for those with annual incomes between $40,000 and $80,000.

Cigarette taxes: Over two years, the tax would go from $1.25 to $1.85 per pack; the tax on other tobacco products—includng untaxed e-cigarettes—would rise to a level equivalent to the cigarette tax.

Oil and Gas Drilling Taxes: Sets a new low Tax Rate of 2.75 percent of producers' gross receipts, with $8 million of gross receipts per well exempt during the first three years. Severance taxes would be eliminated for small conventional gas producers. And 20 percent of severance tax revenue would go to local governments in shale oil and gas-producing regions to help with infrastructure and increased costs from drilling activity and to create a “legacy fund.”

The Commercial Activity Tax: Rate would climb from 0.26 percent to 0.30 percent.

Social services

Drug Abuse Prevention Campaign: Expand “Start Talking!” to encourage parents and children to talk about substance abuse, prioritize $6.5 million for prevention initiatives, allocate $26.9 million for tobacco cessation.

Autism: Creation of a voluntary, free online training and certification program for Ohioans who want to work with people with autism.

Human Services Innovation Office: Creation of an office within the Department of Job and Family Services to “begin preparing people for life and the dignity of work by breaking down silos within the state system for those in poverty.”